Paul Maidment Director of Analysis
Paul Maidment, Director of Analysis, reports back on the Global South
Through a hermetically sealed 35th-floor office window, I gaze down on one of the busiest waterways in the world. Endless lines of container ships, tankers and dry bulk carriers silently ply their trade or lie at anchor in the Singapore Strait. To the east lies the South China Sea and China. To the west, passage through the Straits of Malacca to the oil and gas fields of the Middle East and the markets of Europe and Africa beyond.
For all the digitalisation of the modern economy, physical commodities, components and capital and consumer goods still need to be shifted around the world — some 15-trillion-dollars-worth a year.
The growth of that trade within the Global South has been a defining consequence of the era of globalisation. As our chart shows, it surpassed the trade with the North a decade ago. The relative shares of the South’s trade have not changed significantly since peaking in 2012; the trend is well set.
It is, however, overwhelmingly an emerging Asia story, built on China’s growth and reintegration into the world economy over the past three decades.
The growth of that trade within the Global South has been a defining consequence of the era of globalisation
There are short-term headwinds: US-China trade tensions; the slowing of China’s economy as it switches from high-speed to high-quality growth; a general slow down in the advanced economies; and tightening US monetary policy. The IMF expects developing Asia’s GDP growth to be flat this year and next at 6.3%.
Regardless of whatever deal Washington and Beijing come to over trade and where tariffs settle, the longer term competition between the world’s two largest economies creates uncertainty over the extent to which trade will be diverted, and supply chains reconfigured.
Recent data suggest that there has been some trade diversion. The question is how permanent it becomes. Meanwhile, there is a lot of anecdotal chatter about supply chain reconfiguration, but it will take time for it to show up in the data if rumour becomes a reality. Factories do not get built overnight. Long-standing supplier relationships are not torn up lightly. Production engineering skills do not materialise out of thin air.
Where there are signs that supply and value chains are being reconfigured, it is because of factors such as concern over their length and complexity (and thus fragility), their carbon footprints, increasingly uncompetitive labour costs in China and technologies that allow for more local production — all of which predate President Donald Trump’s adversarial China trade policy.
The longer term competition between the world’s two largest economies creates uncertainty
Longer-term, the prospects look fair for the continuing growth of South-South trade and especially within Asia. The world’s centre of economic gravity will continue to shift eastwards. By 2050, China, India and Indonesia will likely be among the world’s four largest economies, and the ‘E7’ (the world’s seven largest emerging economies) will eclipse the ‘G7’ (the world’s seven largest advanced economies).
Population growth will keep adding productive capacity to emerging Asia, thanks to China and India, but also Indonesia, Pakistan, Bangladesh, the Philippines and Vietnam. And with it, the expansion of a consuming middle class, as the urbanisation of the region continues apace. In Asia, urbanisation rates lag those in advanced economies by about 35 percentage points. There is so much headroom for growth. By 2040, two-thirds of the middle classes will be in Asia.
But the demographics are not unalloyed good news.
There are developing countries that are ageing — just as the advanced economies are. But for different reasons: Falling child mortality in developing countries has created populations with young baby boomer generations whereas the developed countries are greying because of falling fertility rates and increasing longevity.
In the Global South, different countries are at various stages of this transition.
Africa is at one end of the telescope. With the median age of most countries in sub-Saharan Africa now under 20, their populations will have their most economically productive years over the next quarter century.
China, on the other hand, is at the opposite. Over the next 25 years, its demographic dividend of the past quarter-century — increased productivity from a constant supply of new, young labour for its factories — turns into a demographic tax. Its challenge is to get rich before it gets old.
However, an ageing China will also have increased demand for services catering to and caring for older populations. One uncertainty for future trade flows is the extent to which those services will be tradeable across international boundaries. Or will they overwhelmingly be domestically generated?
The demographics are not unalloyed good news
Nor can China’s prodigious growth of the past 30 years be expected to continue for the next 30. It is already transitioning to the naturally slower growth rates of a mature upper-middle to high-income economy.
The glide path of China’s slowdown becomes a critical variable in the growth of intra-Asian trade as China is the leading trading partner of virtually every other country in the region.
President Xi Jinping wants China to be a high-income country in time to celebrate the 100th anniversary of Mao’s 1949 Communist revolution. But making the transition from a middle- to a high-income country is hard, and requires investment in education, social and physical infrastructure, the rule of law and good governance.
Latin America has several examples of countries that did not manage to do that successfully, and have remained middle income and not progressed to being a rich country. China has the added challenge of trying to become rich with the Communist party retaining a monopoly on political power.
The Trump administration is pursuing policies to retard China’s progress to high-income status. The retreat from globalisation towards economic nationalism is a risk. Trade integration is proceeding at a regional level even as agendas based on economic nationalism are pushing protectionist narratives.
There are also significant governance and capacity issues that emerging Asia (indeed, the whole Global South) need to tackle if trade is to continue growing. These will become more salient as trade in the region becomes more services- and information-driven and more digitalised.
Services exports totalled $6 billion in 2018 with $2.7 billion delivered digitally, according to the initial UNCTAD estimates. Of the $6 billion total, the Global South accounted for one-third or $2 billion-worth. That compares with half as much and a quarter share just eight years ago.
Climate change matters as hugely to trade — as to other areas of human endeavour. Virtually all the coastline in South, South-east and East Asia is vulnerable to rising sea levels. Twenty of the world’s 30 busiest container ports — including Singapore’s — lie along it.
AI, automation and technologies such as 3-D printing will be disruptive, although to what extent and on what timeline is of considerable uncertainty. Assuming the world avoids the doomsday scenario of “wealth without workers and workers without wealth”, we can reasonably expect three trends that will directly affect South-South trade:
First, developed economies will re-industrialise by repatriating the production of high-tech capital goods and highly customised manufacture to be closer to the markets in which the final output is bought.
Second, online trading platforms should mean more firms will be able to participate in international trade. A boost in e-commerce and the expansion of fintech solutions to support it should be net positive for trade.
Third, AI will make the trade in services, especially business and professional services, more global and more competitive — and relatively more important to South-South trade. Nurturing sufficiently well-developed human capital and digital infrastructures to take advantage of this must be a priority for policymakers across the Global South if they are going to take full advantage of these trends.
Climate change matters hugely to trade
I ask my host, who has observed the region in the service of his country and regional multilateral institutions for many years, what he considers most important for the region’s continued economic growth. ‘Peace,’ he answers, adding that 40 years of it has allowed the region to prosper.
‘Is peace at risk?’, I ask, counting off the potential hotspots of Taiwan, the South China Sea and the Korean peninsula. ‘Not imminently,’ he replies, “but with ‘America First’…” and lets the sentence trail off as silently as the ships far below.
Paul Maidment Director of Analysis
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